Fed Rate Cut Likely As Inflation Cools and Labor Market Weakens

According to CoinDesk, Thursday's Consumer Price Index (CPI) report indicated that prices are cooling, though inflation remains above the Federal Reserve's 2% target. With the labor market showing signs of significant slowdown, the likelihood of a rate cut in September has surged to nearly 95%.

The CPI report revealed that prices cooled more than expected in June, spurring optimism among traders that the Federal Reserve might cut interest rates this year. Despite Friday’s Producer Price Index (PPI) data coming in hotter than expected, confidence remains high, with CME’s Fed Watch tool reflecting nearly 95% odds of a rate cut in September.

The Fed, balancing price stability and maximum employment, might ease monetary policy if the labor market continues to weaken before inflation hits the 2% target. June's CPI data showed a 3% year-over-year inflation rate, and the U.S. unemployment rate has risen to 4.1% in June from 3.8% in March. John Leer from Morning Consult emphasized that the labor market, despite cooling, remains strong historically, making a "soft landing" by the Fed a rare achievement.

Fed Chair Jerome Powell noted the labor market's slowdown during a Capitol Hill appearance, indicating it no longer broadly pressures inflation. Olu Sonola from Fitch Ratings suggested that the Fed might cut rates sooner given the balanced risks between unemployment and inflation. However, Markus Thielen from 10x Research warned that rate cuts might not be as bullish as traders hope, as investors could shift from risk assets, including cryptocurrencies, to safer investments.

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